Competition and health care costs

The Dallas Morning News has been running a great package[1] on health care costs in Dallas as it is one of America’s costliest cities for health care.

They include a good explanation of research conducted at Dartmouth on regional variations in spending. And they explain how more competition drives up costs.

As most researchers understand, you have to place some limits on the supply of fancy medical technology that does not improve the quality of care. You can’t limit spending by requiring people to pay more out of pocket as some suggest.

After all, most spending is driven by high-priced procedures, and if you go to the doctor with coronary artery disease most patients will not base their treatment decision on out-of-pocket costs. If a doctor recommends bypass surgery most patients will not say they want to try a stent first and see how that works.

As the article notes:

In other businesses, competition tends to drive prices lower as companies jostle for customers. Not in health care, and not in Dallas. Competition drives up spending.

Dallas has seen an explosion of entrepreneurial medical investments for imaging centers, home health care and hospital outpatient treatments. But greater supply has not lowered the cost. Medicare spending in Dallas for these services is among the highest in the nation.

“The laws of supply and demand are not working,” said Darren Rodgers, president of BlueCross BlueShield of Texas. “We have lots of hospitals, lots of doctors and lots of demand.”

Since the early 1990s, Dallas has experienced a boom in hospital construction. Hospital administrators argue they are only trying to keep pace with a surge in the population. David Toomey, regional president for health insurer CIGNA HealthCare, says it’s an economic system turned upside down. “When you build it, they will come,” he said.

Comparative effectiveness research; coordination of care; bundled payment systems — these are the strategies that will hold down long-term health care spending.